Abstract

In the study area predominantly three
marketing options were available for the dairy farmers; unorganized vendors,
formal / organized dairy cooperatives and integrated contract system.

A majority of dairy farmers around 57.3 percent
had shifted from one marketing option to another. The rest 42.7 per
cent of dairy farmers remained in the same marketing option from
the day they began commercial milk production. A major shift from
vendors (informal system) to contract (39.5 per cent), followed by
vendor to co-operative (24.4 per cent) and co-operative to vendor
(19.8 per cent) was noticed. Irregularity in payment and stoppage
of procurement by vendor system made dairy farmers shift from
vendor system to others. After the weakening of vendor- farmer
relationship and initiation of Milk Producer Cooperatives at the
village level, there has been a shift from vendor to co-operative
system. When the dairy sector opened for private investment coupled
with poor performance of cooperatives, farmers shifted towards new
marketing option the 'integrated contract system'. Irregularity in
payment, distant location of collection centre and inability to
milk the animals were reasons for shifting back to vendor from
other marketing options.

Prompt payments, sustainability of
marketing systems in business were major factors responsible for
retaining members and attracting new dairy farmers. Dairy farmers
with the experiences of various marketing options gave more
value to the prompt payment for the milk sold on comparing to milk
prices.

Background on milk marketing options

In the study area predominantly three marketing options were
available for the dairy farmers. In the unorganized sector, private vendors,
and in the formal / organized sector the dairy cooperatives
and integrated contract system were the options. The vendor system
refers to the system where an individual middleman purchases milk
from dairy farmers and in turn sells it to consumers. The system
works on an informal agreement with the farmers. On the other hand
cooperatives were organized such that dairy farmers voluntarily
associate themselves as members of the cooperative, on the basis of
equality for the promotion of their socio-economic well being,
i.e. Milk Producers Co-operative Society (MPCS). While in
the Integrated contract system there is the association,
co-ordination and amalgamation of companies engaged in various
stages of production of a particular product or related products,
so that there will be a smooth flow of inputs and outputs, from one
unit to other, leading to an overall reduction in the cost of
production of the final product (Narahari et al 2000). In this
study, integrated contract system means the association of
resources, co-ordination of dairy related activities, and
amalgamation of dairy production at varying levels in various
stages of the production up to marketing by a private firm. This
system is also referred to as "contract farming" and the farmer is
referred to as "contract farmer".

The existence of the three marketing options necessitated
understanding the farmer's reasons for selection of marketing
systems to sell their milk. The study was taken up, keeping in view
the above methods of marketing options for dairy
farmers.

Methodology

The research design employed for the study was
ex-post facto design, since the variables chosen have already
occurred. The vendor and co-operative systems of procurement are
operating in the study area for many decades. The integrated
contract system on contract agreement with dairy farmers is
comparatively new and is in existence for the last eight years in
the study area.

Namakkal district of Tamil Nadu province was selected
for the study, because it falls under the Salem-Namakkal district
co-operative milk producers union, which is procuring the highest
amount of milk (2.87 lakh litres) per day in the province of Tamil
Nadu. Secondly, Hatsun Agro Limited, one of the major
private dairies having 60 per cent of private dairy market sector
in Tamil Nadu is operating on contract agreement with the farmers
as dairy integrators in this district. And all the three systems of
milk procurement namely vendor, co-operative and integrated
contract systems are operating in this area.

Change of marketing options among dairy farmers

The composition of respondents applying the three marketing
systems and their reasons for choosing one over the other over are
presented and discussed in this paper.

From Table 1 it was observed that more than half (57.3 per cent)
of the dairy farmers had made a shift from one to another marketing
option.

Table 1. Distribution of Respondents based on shift from one system to
another (n = 150)

Sl. No

Description

No.
of dairy farmers

Percentage

1.

Not shifted

64

42.7

2.

Shifted

86

57.3

Total

150

100

It was observed that 42.7 per cent of dairy farmers remained in
the same system of marketing from the day they began commercial
milk production.

Table 2 indicates that the major shift was from vendor to the
integrated contract system (39.5 per cent) as well as to the
co-operative system (24.4 per cent).

Table 2. Distribution of dairy farmers, shifted from one system of
marketing to other n = 86

Sl. No

Change over of the marketing options

No
of dairy farmers

Percentage

1.

Vendor
to integrated contract system

34

39.5

2.

Vendor
to co-operative system

21

24.4

3.

Co-operative to vendor system

17

19.8

4.

Co-operative to integrated contract system

7

8.1

5.

Integrated to vendor system

4

4.6

6.

Traditional marketing system to co-operative system*

3

3.6

7.

Integrated to co-operative system

0

0

Total

86

100

*
Direct sales to the consumers

This shift is attributed to the initial periods of formation of
the above two systems and the provision of services like artificial
insemination, veterinary services, feed supply, price based on
quality of milk and assurance of regular payment, bonus, credit
facilitation and technical inputs. This wide range of services and
credibility of the integrated contractor and co-operative systems
has become a better alternative to the vendor system. These two
marketing options have capitalized the weakness of the informal vendor
system and have made an in-road into the organized dairy
sector.

The first shift of the dairy farmers was noticed during the
entry of integrated contract system 9 years ago, when it was first
introduced, while the later one during the initiation of
cooperatives under the operation flood program (World Bank
supported program) initiated in the 1970s.

On the other hand it is interesting to note that a
remarkable shift is noticed from the co-operative to vendor system
(19.8 per cent) and integrated contract system (8.14 per cent).
This shift may be due wide range of reasons from loss of
creditability, low profit margin and irregularity of payment to
milk sold or poor service to the members of co-operative system. On
the other hand, the shift from integrated contract system to co-operative was
not noticed. The other possible shifts among the marketing systems were
meager. The following section discusses specifically the jump over in marketing options among dairy farmers
and specific reasons involved in it.

Preferences and the reasons behind shifting of
marketing options for selling milk

Table 3. Reasons for shifting to co-operative system from vendor system
(n = 21)

Sl. No.

Reasons

No.
of dairy farmers

1.

Irregularity of payment

11

2.

Vendor
discontinued

4

3.

Co-operative system established

4

4.

Low
price for milk

1

5.

Inappropriate measurement

1

Multiple responses not to total

Most of the shifting by dairy farmers happened immediately after
the formation of MPCS during the 80's and 90's. Before the
arrival of the dairy cooperatives, irregularity in payment for the
milk sold and huge exploitation of dairy farmers by the middleman
existed (Ghuge and Netaji Powar 1992). Vendor's irregularity in
payments led to the initiation of MPCS. This in turn paved way to
farmers shifting away from the vendor system. After the cooperatives
were established the business of vendors came down ultimately
resulting in reduced milk procurements and finally weakening of the
vendor system. This also forced the few dairy farmers wanting to
follow the vendor system, to opt for MPCS. The above were the
primary reasons for shifting from vendor system to co-operative
system.

Table 4 indicates the reasons for dairy farmers shifting over to
integrated contract system from other two systems.

Table 4
.
Reasons for shifting to integrated contract system from other systems

Sl. No

Reasons

No.
Shifted from Vendor (n = 34)

No.
shifted from Co-operative (n = 7)

1.

Irregularity of payment

22

7

2.

Vendor
discontinued

13

-

3.

Low
price paid for milk

7

-

4.

Dissatisfaction over SNF and fat measurement

-

1

Multiple responses not to total

The opening of the dairy sector for private players
in early 90's resulted in further increase of competition and business failures
of the vendor system resulting in exit of a section of vendors. The
closure of business (discontinuance of vendor) and unsatisfactory
milk procurement prices forced dairy farmers to shift from vendor
to integrated contract system. The reason for shifting to
integrated contract system was primarily due to irregularity in
payment by the co-operative system, which started to percolate in
the mid of 90s.

The irregularity of payment started to grip the MPCS system
similar to the vendor system due to business failures and
privatization of the dairy sector (Vydhianathan 2001). This made
farmers look for better alternatives, which can promptly pay for
the milk they sold. On the other hand, under the open economy the
contract system started to emerge out in a phased manner. This
provided the dairy farmers new options for marketing of milk. The
irregularity of payment for the milk sold forced the dairy farmer,
to shift over to contract system.

Table 5 reveals the reasons for shifting of dairy farmers from
co-operative and integrated contract system to the parental vendor
system.

Table 5. Reasons for shifting to vendor system from other
systems

Sl. No

Reasons

No.
shifted from Co-operative n = 17

No.
shifted from Integrated n = 4

1.

Irregularity of payment

9

2

2.

Distant location of sales point (collection center)

4

1

3.

Inability to milk the animal

3

1

4.

Closure of collection centre

3

-

5.

Restriction on milk quantity to be sold

-

1

5.

Non-availability of loan

1

-

Multiple responses not to total

This shift resulted in the farmer returning to the old option.
The irregularity of payment for milk was the main reason for change
over from co-operative to vendor. Other important reason was
distant location (in certain cases the farmers needed to travel
three to four kilometers to sell the milk to cooperatives) of milk
collection centers against vendor procuring milk at farm gate.
Business failures subsequently lead to MPCS closure, which in turn
led the farmers to look for other alternatives to sell their milk,
finally resulting in ending up with vendor for their conveniences.
Certain farmers who were unable to milk their animals started to look
for vendors who provided milking services.

Irregular payments for the milk, unable to milk the animal and
distant location of collection centers were the prime reasons in
the descending order for shifting from the integrated to vendor
system.

Conclusion

Prompt payments, sustainability of marketing systems in business
were major factors responsible for retaining and attracting new dairy farmers. Gopalakrishnaiah and Pochaiah (1989),
Thirunavukkarasu et al (1992) and Rao (1997) observed that members
of MPCS found low procurement prices for the milk as one of the
constraints. But with the experiences with various marketing
options, farmers feel that rather than milk prices, prompt payment for
the milk sold is a greater issue.

On a major scale the shortcomings of the cooperative system were
converted to advantages for the integrated contract system. This
facilitated the contract system to retain farmers. The farmers
appreciated the payment pattern in the contract system. This was
essential to cut out the competition from the cooperatives, which
owned a higher share of the organized milk market. On the other
hand the shortcomings of the organized sectors retains the vendor
system in the business with a reduced role in the study area. But
it may be very premature to pass on valuable judgment on these
counts. The organized private dairies are in the scene in the last
nine years, so it may take time to completely stabilize operations
in the diverse socio economic background and to establish a marked
difference in this aspect. So it may be a bit to early to conclude if the
contract system is the best marketing option for the dairy farmers to sell
their milk.